Reader JP sent me this question (edited slightly to shorten):

One of the main goals is to determine if a deposit is economically viable but this is pretty hard to do with a junior exploration company b/c general investors don't readily have access to capital, operating, and reclamation costs, especially if only a maiden resource estimate exists or no estimate has been determined to date.

I'm wondering if you do back-of-the-envelope calculations to determine the potential value of a company? If so, what inputs do you use? I'm assuming the best way would be to find another similar resource, hopefully within same jurisdiction, where a mine was already built to gauge the costs. Obviously, nothing is exact but at least an investor would have a ballpark idea of the potential value.

If you don't use back of the envelope calculations at all, are you solely basing when to exit on news releases and follow-ups with management?

Overall, it would be nice to be able to build a back-of-the-envelope model to gauge potential return or even make a determination early on if it's worth sticking around.

Having an exit strategy is a good idea. What goes up always comes back down. I've also read 80% of investors often don't turn their paper gains into realized gains. Knowing when to get out is pretty important, after all, we don't put all the time and effort into researching a company to come up empty-handed in the end.

It took a lot to answer this question, because it really asks: how do I decide if an advanced discovery is a good investment opportunity?

Answering that question should take a lot because it requires me to explain my entire process for stocks of this stage.

I’m happy to do so. Before I start, I want to emphasize that this is written for projects at the stage JP references – those approaching or with new maiden resources. I emphasize that because my process differs for pre-discovery, new discovery, or mine plan stage projects. Many of the concepts still matter but the valuation considerations differ.

I also want to provide a sneak peek at my conclusion, which is that I’m buying Goliath Resources (TSXV: GOT). I used this exercise – explaining how I decide whether I want to buy a stock with an advanced discovery – to assess Goliath. The timing was ideal: I had been meaning to put GOT through the paces over the last two weeks because I knew the company was going to announce a financing and I needed to decide whether to invest. I saw news of that financing this morning, just as I got to the part of this article where I wanted to demonstrate my process with a real example.

So I assessed Goliath today and wrote about it. The process led me to believe GOT is undervalued relative to the resource they will likely deliver after this summer’s drill program, for reasons I outline. There is also a real chance GOT could drill into a second discovery at the Golddigger project when they test a target 4 km away on strike from the main discovery that looks very similar.

OK – with the disclaimer and sneak peek done, let’s dive in.

Red Flags, Valuations, and Opportunities

For better or worse, I do not build valuation models. Certainly many investors do and they use the results to guide their stock expectations.

My approach differs. Instead of trying to model how a maiden or evolving resource might be mined, including estimating all the many and varied approaches and costs in building and operating a mine, I look at red flags, stage and pending milestones, and comparable projects.

If I see a growing new discovery or a maiden resource that looks interesting, I immediately start trying to poke holes. I want a discovery to work as much as the next person but the market knows that a deposit only ever has a chance of working as a mine if there are no major stumbling blocks along that path.

• What is the metallurgy? Leaching – on a heap or in a plant? Any complications like the need to agglomerate or high acid consumption? Milling – via a simple conventional flowsheet or a complicated one? Recoveries – low, medium, or high? Metal in the ground is not valuable if the process to separate that metal from the rock is complex, expensive, and/or not very effective.
• What shape is the deposit and how will it be mined? Open pit – what is the strip ratio? High strip ratios require high grades to carry the extra cost. Underground – bulk or selective (wide or narrow zones)? Steeply dipping or flat lying (gravity helps move ore with steep deposits; flat-lying zones usually require more handling)? One mining area or multiple? How easy or complicated will it be to access enough ore and move it out of the mine (one ramp, two ramps, shaft, combo?)
• Does it seem like a mine could be permitted? What regulators are involved (BLM, Forest Service, US Army Corps of Engineers (if there’s a river, creek, etc.), municipal, state? Are they generally functional with respect to mining permit requests in that area? Are local populations familiar with mining? Are there parks or protected areas nearby? How close is the nearest town?
• Where is the project and what infrastructure exists vs would have to be built? How much roughly would those projects cost and would those they present permitting risk? (Ex: a significant new road or power line or water demand)

Identifying red flags then lets you consider whether the deposit in question is good enough to be mined. ‘Good enough’ relates to size and grade.

If the questions above do not return a red flag, an imperfect deposit might work, perhaps one that’s low grade but has scale, has moderate grade and scale, or is high grade and small.

If the questions above do return a red flag, the deposit must be pretty good quality to handle the burden: moderate grade and large scale or high grade and moderate scale. Low grade deposits struggle the most to get over challenges – they can work (lots of porphyry deposits are pretty low grade) but it’s not easy and many don’t.

If the deposit is perfect – high grade (relative to deposit type) and large, for instance – it can handle some red flags. Ideally, of course, a deposit is fantastic and has no red flags!

Once an asset passes the red flags process, I move on to what the asset is worth. And even though it seems valuation should be a calculation, I find this part the hardest to determine.

JP is right that the most useful inputs come from comparable projects. If you are building a mine model, similar new mines in the area can provide all kinds of costs, from labour to tires to power, and parameters, like energy to crush to a particular size or reagent consumption on processing.

As I said, I don’t build mine models. I use similar new mines in the area as another red flag assessment (did it encounter any?). And I use similar, slightly more advanced projects in the area to see how the market feels about such assets.

This is where things get hard to pin down. If similar, slightly more advanced assets have much higher valuations, the project you’re assessing might have a weakness you haven’t figured out or might not have been noticed in the market yet. The former is a red flag; the latter is an opportunity, as long as you think management will be able to attract attention.

The other hard-to-pin-down factor is exploration potential. If you are assessing a new discovery around the time of its first resource, the count gives a starting point for valuing the stock but valuation is also about what the market thinks the deposit might become.

That gets complicated. It requires one to understand geology, how open the deposit is and how strong the reason to believe mineralization continues in each direction, how targeting has worked to date at the property, what targets the company will test next and why, whether the company has cash to do that work, and whether exploration will continue largely uninterrupted or whether seasonality puts work on pause for months (snow, big rains, heat and drought, etc.).

At the end of the day, investment opportunities for projects close to first resource come in two types.

1. 1. Market hasn’t noticed the opportunity yet. This could be because of a lack of marketing means few people know the story, because a complicated mineral system makes it hard to see how much mineralization they’ve already drilled, because the market is concentrating on one part of the story but hasn’t realized another big emerging part, or because overall metals investment sentiment is weak.
2. 2. The resource is only the first step in defining a much larger deposit. As the deposit grows the stock should gain value, assuming the deposit is good (no red flags) and the market is paying attention / metals investor sentiment is reasonable to good.

Both can work well. Opportunities in the first category are riskier, as they require the holdback to be addressed: the company must start marketing effectively, the team must figure out how to explain the system or publish a surprisingly strong resource, the new part of the story must generate exciting results that amplify the overall potential, or the weak metals market must turn around.

Opportunities in the second category are the best. You invest after discovery and some drilling, which reduces exploration risk notably, but before the discovery has flexed its muscles, which leaves lots of room for value growth if those muscles impress. You miss the discovery share price lift, but discovery lifts are much more volatile than the ascent that happens as drilling turns a discovery into a deposit that looks mining worthy.

I’ll use Outcrop Silver & Gold as one example. The stock has tripled since last summer, when I would say the stock presented as a category 1 opportunity for three of four reasons: it’s a complicated mineral system so the market had trouble seeing how much Outcrop had achieved and the team wasn’t marketing much because sentiment was weak.

Then in the fall their efforts started to click. Some strong investors saw the opportunity and wanted in. That led to an oversubscribed financing. The money enabled a bigger drill program, big enough to complete the drilling to inform a maiden resource (that just came out yesterday). Along the way, the team figured out some better ways to explain the system and capture the opportunity.

Weak precious metal sentiment in the first six weeks of the year took back some of OCG’s gains but then sentiment came back (for Have stocks) and OCG got back up to its late-2022 highs.

As for a category 2 example, I’ll go with Troilus. To be clear, TLG is not a maiden resource situation but it has been transforming the scale of the opportunity at its namesake project over the last two years by defining several new deposits with low-strip and (relatively) high-grade mineralization, expanding the overall count, demonstrating significant regional potential, and successfully derisking the project on multiple fronts including metallurgy and geotechnical understanding. So this is an advanced project but the transformation is significant enough that it's akin to a maiden resource flexing major muscle and becoming much more.

I think the market finally realized this transformation last fall. Since then, TLG has doubled.

Of course, what’s probably more useful are examples of stocks in both categories that haven’t moved yet!

I will give one that I’m currently assessing; we can work through the process together.

Assessing A Stock: Goliath Resources (TSXV: GOT)

Goliath’s Surebet discovery at the Golddigger project has not gone unnoticed: GOT’s share price went from $0.20 in late 2020 to as high as $1.60 two years later as Goliath fleshed out the discovery.

Context: the Golddigger property is in northwest BC, at the south end of the area known as the Golden Triangle. It is neighbours with Dolly Varden and the Surebet discovery sits 4 km from that project’s access road, which connects to the tidewater town of Alice Arm about 15 km to the south.

Surebet is a fault-hosted gold zone that cuts across a mountain, outcropping on either side. Tracking the zone up one side of the mountain and down the other creates 1 km of strike; the mountain and the deepest drill intercepts create 1 km of down-dip extent, open to depth.

Goliath has tested Surebet with 56 drill holes so far. Those intercepts support a zone averaging 6.8 metres width and 6.3 g/t gold.

At depth the Surebet zone intercepts a mineralized, flat-lying shear zone called the Bonanza shear. Thirty-three holes into that structure have outlined a zone 5.3 metres wide averaging 3.6 g/t gold.

This summer Goliath will do the infill drilling needed to define a maiden Surebet-Bonanza resource.

The market finds infill drilling boring. The expectation that this summer’s results will not generate the kind of excitement that the discovery kicked out in its first two seasons prompted some investors to sell, cashing in on a very nice return riding the initial discovery price gains.

All that has led to this share price chart.

The stock ascended nicely for two years until last fall. Now it is down by half relative to its $1.20 average in 2022; it’s down by 64% compared to its October high. Importantly, there were no developments in the last six months that damaged the discovery and its potential.

So – is this a good buy right now??? The market often gets bored when the discovery phase ends, but has the market discounted the price too much because this season will be more boring?

And will the season be boring? Here we get into exploration possibilities. This summer Goliath will also drill a new target called Goldswarm. It’s 4 km north of Surebet along the same ridge (on strike) and on surface looks very similar: high-grade channel samples (29.7 g/t gold over 0.6 metres, for example) and grab samples (54 g/t gold, 47 g/t gold, 26 g/t gold), similar rocks and alteration, and similar structural setting. So there’s potential that Goliath could drill into another discovery this summer.

The other reason Goliath has been under selling pressure of late is that the company needed to raise money to fund this summer’s work. Just this morning the company announced a financing: they are raising $8 million. It’s a charity flow-through financing (a financing structure that uses two tax advantages together) with a real back-end price of $0.635 per unit, which is exactly what the stock traded down to this morning.

So Goliath fits JP’s question perfectly. This is a stock that has spent two years fleshing out a very nice discovery. A maiden resource will come out after this season of drilling, which the market expects to find boring because it’s infill. Goliath will also, however, test a nearby target that looks very similar and has the potential to deliver a second discovery. And the infill program will inform a maiden resource.

What value does this stock deserve?

Let’s start by considering how much gold they have likely outlined at this point – in other words, let’s estimate the resource based on results to date. Goliath provides great help in that with this model.

We convert cubic metres to tonnes using specific gravity. I asked and the average SG of these rocks is 2.9. That means Surebet is just shy of 16 million tonnes and Bonanza is 37.7 million tonnes.

Using the average 6.3 g/t gold equivalent grade means Surebet contains 100 million grams of gold equivalent, which converts to 3.2 million gold equivalent ounces. Using Bonanza’s 2.7 g/t gold equivalent grade gives that zone 102 million gold equivalent grams, or another 3.2 million gold equivalent ounces.

The zones have shown good consistency thus far but conservatism decrees I knock 15% off this ballpark, which gives 5.4 million gold equivalent ounces in two connected zones that appear, at this early stage, mineable. Surebet in particular is wide, steep enough that gravity would help, and could likely be accessed via a tunnel from the valley. And the Surebet zone is attractively high grade.

First pass metallurgical testwork shows that conventional gravity and flotation processing recovers 92% of the gold, 86.5% of the silver, and better than 95% of the lead and zinc (which are present in quite small amounts).

The project is close to roads and power lines. Permitting would not be easy – there are multiple First Nations groups in the area – but is certainly possible.

So right now, because of the sense the story is getting boring and the need to finance, there’s a stock available for $58 million that has outlined 5.4 million good quality ounces in a desirable mining locale in a project that will have a maiden resource after this summer’s drilling and might deliver a second, nearby, similar discovery this year.

Is that cheap? I think so.

My two main technical reasons for liking the stock are I think that the market is focusing on the ‘boredom’ of infill drilling rather than the quality 5+ million gold equivalent ounce resource that it should produce and the market is not giving any credit to the potential to find another Surebet this year at Goldswarm.

I also want to note that this stock has made big moves up and down several times over the last few years. In 2018 the stock ran up to $3.85 on excitement ahead of first drill programs at two other projects called Lucky Strike and Copperhead. They did discover a porphyry at Lucky Strike but porphyries are fickle beasts and that one didn’t pan out. By then, though, Goliath was starting work at Golddigger and establishing a land package in Quebec.

That the stock has attracted attention is overall a good thing. It means lots of people know Surebet, which should mean a similar discovery at Goldswarm would attract good attention. It means people ‘play’ GOT, trading in ahead of the season and selling on good results, which could layer some seasonal opportunity on top of the overall thesis. And it means the financing that is currently open is popular, so they will have at least $8 million to spend at Golddigger this summer (while GOT isn’t a Have stock based on its share price, it has enough recognition and momentum to raise capital, which matters).

Neighbouring stock Dolly Varden has a $263-million market cap today. Combining the indicated and inferred counts from several zones at two project, DV has 140 million silver equivalent ounces on its books, or 1.9 million gold equivalent ounces.

I wrote about Dolly Varden two weeks ago, congratulating management therefore courting such interest in the stock. DV also stands out because it’s silver, an arena that is always short on stocks with good trading volumes, large market caps, and significant upside potential.

But even acknowledging that DV is getting premium valuation for its assets ($138 per gold equivalent ounce, versus an industry average of $41 per ounce), I think it’s reasonable to guess that Goliath might get a quarter of DV’s per-ounce valuation once it publishes a resource.

If that happens, on publishing a 5-million-ounce resource, GOT could be worth something like $170 million, almost three times its market cap today. If it gets only a sixth of Dolly Varden’s lofty per-ounce valuation its market cap would still double.

There are two assumptions in this forecast. The first is that infill drilling supports the resource model (no negative surprises). The second is that the precious metals market is strong enough in late 2023/early 2024 that GOT gets a reasonable per-ounce valuation when it gets its maiden resource out. I am comfortable with those assumptions.

The forecast does not try to account for the potential to hit into a new discovery at Goldswarm.

This has been a very useful exercise! I honestly started this article not knowing where I would end up because I hadn’t done the resource or the valuation ballparking prior. Now that I have, I want to own GOT.

To be clear: I will buy in the financing because I have that opportunity. Premium subscribers will as well. The stock is currently trading at the same price in the market, so I will add it as a market buy. By buying in the financing I also get a half warrant along with each share; whole warrants can be used to buy additional shares for $0.92 for two years.

Exit Strategy

OK. My example took on a life of its own there. Before I wrap up, I should address the last part of JP’s question: exit strategy.

He is so right that it’s important to have an exit strategy. Junior miners are not stocks that you buy and just hold. Every stock buy should come with a catalyst-based investment thesis; every time the company achieves or fails at a catalyst, you should revisit your thesis.

With Goliath, the key pending catalysts are summer drill results, from Surebet/Bonanza and from the Goldswarm target, and the resource estimate. Along the way, two other factors might add energy to the stock or might not show up at all: seasonal buying (investors who buy Golden Triangle explorers as the short drill season is getting underway, with an eye to sell before or as results are reported) and gold sentiment.

So my thesis is to watch the share price and news over the next six months. If infill drilling starts to suggest the zone is not as continuous as we think, the resource leg of the thesis weakens. In infill results are good, that leg remains strong.

If Goldswarm delivers a discovery, I might cash in on a price spike or hold if I think the valuation potential has increased significantly, more than the discovery price spike offers. If Goldswarm doesn’t work out, the thesis reverts to just the resource valuation.

As the resources approaches, I plan to watch the stock. Depending on gold sentiment, overall investor risk appetite, and whether the drill results generated excitement or not, the stock might run up nicely ahead of the actual resource. If that happens, it will be worth considering an exit then.

If I still own when the resource comes out, I will need to then establish a new investment thesis. My thesis says GOT is undervalued relative to the pending resource estimate. Once that estimate is out there might be good reason to hold the stock but it will be a different reason with a new timeline.

While that is all particular to Goliath, the concept applies to all junior metals stocks. Have a thesis based on pending catalysts. Once those catalysts transpire, whether the thesis worked or not you must develop a new reason to own the stock or sell.

And in developing your investment theses, keep the Lassonde Curve in mind. While a stock rarely goes from discovery to production and actual share price performances are always more volatile than this smooth chart suggests, the concept is sound. Stocks gain from discovery to PEA, roughly, as the market buys into a good discovery up until it becomes apparent it will likely become a mine. Then those buyers exit, and the stock/project spends years in the investing doldrums while it does all the infill drilling, engineering, and permitting needed to build. Once that’s done and construction starts, investors show up again and ride the stock as it builds its way to cash flow or gets taken out on the way.

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